2. Subprime
crisis
What is
subprime
crisis ???
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3. SUB PRIME CRISES: A BRIEF OVERVIEW
It is the practice of giving loans to
borrowers who do not qualify for market
interest rates owing to various risk
factors such as :-
Income level
Size of the downpayment
Credit history
Employment status
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4. Hence subprime loan would
mean high risk as well as high
gain/profit
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5. Hence a subprime loan would
mean high risk as well as high
gain/profit
• If I lend 10 prime loans of 1
Example lac each at 8% P.A. monthly
reducing for tenure of 60
1 months , I can expect a
return of 2,16,800/-
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6. Hence subprime loan would
mean high risk as well as high
gain/profit
• If I lend 10 prime loans of 1 lac
each at 8% P.A. monthly
Example reducing for tenure of 60
months , I can expect a return
1 of 2,16,800/-
• If I lend 10 sub-prime loans of
Example 1 lac each at 10% P.A. monthly
reducing for tenure of 60
2
months , I can expect a return
of 3,34,400/-
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10. Adjustable Rate
Securitization Mortgages (ARM)
A process of standardizing An ARM is a mortgage
contractual terms which loan where the interest
allows a loan to be packaged rate on the note is
with other contracts and sold periodically adjusted
as a diversified bundle to based on a variety of
passive investors. indices.
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12. Excessive risk taking
Inaccurate Credit
in govt. sponsored
Ratings
enterprises
Government sponsored
enterprises are a group of
Giving inaccurate credit
financial services
ratings was a major cause
corporations created by
of the subprime crisis.
the United State
Congress
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14. Mortgage Backed
Security
Mortgage backed securities are
a bundle of mortgages that
have been sold by banks to
Fannie Mae, who then
repackages them and sells
them to individual investors
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15. Impact of sub-prime
crisis in US
Financial Market Sustained effects Financial Market
impacts, 2007 impacts, 2008
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16. • First subprime related loss was
Financial reported by HSBC.
market • Money was taken out of
mortgage bonds and put into
impacts, 2007 commodities as “stores of
value”
• Sub-prime related losses in banks
Financial all over the world, wiped out much
of the capital of the world banking
market system by November 2008.
impacts, 2008 • The crisis hit a key point when
Lehman Brothers failed in Sept.
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17. • In Spring, 2011 there were about
a million homes in foreclosure in
Sustained the United States, several million
more in the pipeline, and 872,000
Effects previously foreclosed homes in
the hands of banks
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18. LONG TERM SOLUTIONS
U.S. Treasury Secretary Timothy Geithner testified before Congress on October
29, 2009 which included five elements critical to effective reform:
1. Expand the Federal Deposit Insurance Corporation bank resolution mechanism to
include non-bank financial institutions
2. Ensure that a firm is allowed to fail in an orderly way and not be "rescued“
3. Ensure taxpayers are not on the hook for any losses, by applying losses to the
firm's investors and creating a monetary pool funded by the largest financial
institutions
4. Apply appropriate checks and balances to the FDIC and Federal Reserve in this
resolution process
5. Require stronger capital and liquidity positions for financial firms and related
regulatory authority
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19. Thank You!
Hope you had a pleasant
learning experience.
Feel free to contact us:
mentor@wordpandit.com
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